Low India Inflation Is Double-Edged Sword for Modi Before Polls

(Bloomberg) -- Subdued inflation in India is proving to be a dilemma for Prime Minister Narendra Modi weeks before a crucial vote.

While most politicians heading into elections would want to cheer their efforts in taming the inflation dragon -- especially in emerging economies like India, where price surges can oust governments -- Modi has been restrained about this achievement.

That’s because low inflation has been driven by falling food prices, cutting farmers’ incomes and pushing up debt levels. About 800 million of India’s 1.3 billion population depend on farming for their livelihood.

“While Modi has managed to keep inflation under control, it has come at a cost,” said Priyanka Kishore, head India and South-east Asia economist at Oxford Economics in Singapore. “Falling rural incomes and farm distress have taken the shine off one of the key achievements of the Modi government.”

On the plus side, the slowdown in inflation raises the prospect of another interest-rate cut in April, providing Modi with a much-needed boost to the economy. Data on Tuesday showed an acceleration in price-growth in February, though inflation is still well below the Reserve Bank of India’s medium-term target of 4 percent.

“A more-than-expected pickup in inflation and stable core is likely to make the monetary policy committee stay on the gradual rate-cut path rather than aggressive front-loading,” Citigroup Inc. economists led by Samiran Chakraborty said in a note. “Our base case remains for a 25 basis-point cut in April and possibly June too.”

Inflation has more than halved under Modi’s regime, averaging 4.8 percent since 2014. In contrast, consumer-price growth averaged more than 10 percent during 2009-2013.

What Bloomberg’s Economists Say

“The pickup in headline inflation in February should be treated with caution given it was largely driven by comparatively low food prices last year. A marginal drop in core inflation and weak industrial growth data for January also imply inflationary pressures may be easing.”

--Abhishek Gupta, India economist
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Modi was voted into power on a promise to double farmers’ incomes by 2022. He also pledged to fight persistent high food inflation, which had triggered anger toward the previous Congress-led government.

His administration tackled hoarders and carried out agriculture marketing reforms that have helped to break the monopoly of licensed traders and lowered marketing costs for farmers.

Weak Growth

The introduction of a goods and services tax in July 2017 has also brought down food transportation costs, according to Pranjul Bhandari, chief India economist at HSBC Holdings Plc, while bumper harvests, both at home and abroad, have helped keep food prices tame.

With inflation showing little signs of gaining traction toward the RBI’s target and the economy performing below its potential, expectations are growing of back-to-back rate cuts after February’s surprise 25 basis-point rate reduction.

A separate report on Tuesday showed growth in industrial production slowed to 1.7 percent in January from a revised 2.6 percent in the previous month.

Governor Shaktikanta Das, who is seen favoring monetary policy easing, has flagged concerns about weaker growth, saying benign inflation conditions make it easier to lower rates and give a boost to investments at a time when global risks are rising.

--With assistance from Manish Modi and Vrishti Beniwal.

To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Michael Heath

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